Summary

Over the past several decades, the nation’s housing policy has focused predominantly on increasing homeownership. Most federal housing expenditures now benefit families with relatively little need for assistance. More than 75 percent of federal housing expenditures support homeownership, when both direct spending and tax subsidies are counted. The bulk of homeownership expenditures go to the top fifth of households by income, who typically could afford to purchase a home without subsidies. Overall, more than half of federal spending on housing benefits households with incomes above $100,000.

Meanwhile, low-income renters are far more likely than higher-income households to pay a very high share of their income for housing and to face other serious housing-related problems. Research has shown that rental assistance sharply reduces homelessness and housing instability — conditions that have a major long-term impact on children’s health and development — and generates other important benefits. Yet, federal rental assistance programs only reach about one in four eligible low-income renters, due to funding limitations.

The time is right to implement a more balanced housing policy. Policymakers in both parties have proposed reforms to homeownership tax expenditures that would make them more efficient andraise added revenues to reduce the deficit. The Bowles-Simpson and Rivlin-Domenici deficit reduction commissions and the George W. Bush Administration’s Advisory Panel on Federal Tax Reform each proposed to convert the mortgage interest deduction to a credit that would increase revenues and reach a broader share of low- and middle-income homeowners. Congress could further improve the effectiveness and fairness of the nation’s housing expenditures by directing a modest share of the savings from reform of homeownership subsidies or other tax expenditures (once deficit reduction goals have been met) to address part of the unmet need for housing assistance among lower income renters, in the form of a federal renters’ tax credit.

The renters’ credit would be administered by states and implemented through a public-private partnership with property owners and lenders. Each state would receive a fixed dollar amount of credits, and would allocate the credits based on federal income eligibility rules and state policy preferences. This approach would make it possible to provide credits sufficient to help more poor families afford housing at a relatively modest overall cost. For example, a renters’ credit capped at $5 billion — costing less than 3 percent of total federal homeownership tax expenditures — could assist about 1.2 million of the lowest-income renter households. It could reduce each household’s monthly rent by an average of $400; its value alone would lift 270,000 families out of poverty and lift four of five of the poorest families it assists out of deep poverty (defined as having income below 50 percent of the federal poverty guidelines).

Families assisted with credits would pay no more than 30 percent of their income for rent (unless the rent exceeds a cap based on typical rents in the local market, in which case the family would pay the remainder). States could award families credit certificates that would enable them to use the credit to help rent a modest unit of the family’s choice. Alternatively, states could also enter into agreements allocating credits to particular owners or lenders, which would use the credits to assist eligible families. The owner of the rental unit would claim a federal tax credit based on the rent reduction it provides, or the lender holding the mortgage on the property could claim the credit in return for a reducing the owner’s mortgage payments.

A renters’ tax credit would complement the existing Low-Income Housing Tax Credit (which works well as a subsidy for affordable housing development but is rarely sufficient on its own to push rents down to levels poor families can pay), and rental assistance programs such as Section 8 vouchers (which are highly effective but meet only a modest share of the need).

States could also coordinate the credits with other state-run programs and target the credits to address state priorities. For example, states could use credits to:

end or substantially reduce homelessness among veterans and individuals with severe health needs;

provide supportive housing to families at risk of having their children placed in foster care;

help families participating in state TANF (Temporary Assistance for Needy Families) or other employment-promoting programs for whom lack of stable affordable housing is a barrier to work;

provide stable housing near high-performing schools for families with school-age children; or

enable low-income elderly people or people with disabilities to live in service-enriched developments rather than in nursing homes or other institutions.

Such initiatives would not only further important policy goals and provide needed help to some of the nation’s most vulnerable people, but they would also generate savings in health care, child welfare, and other systems.